What’s Happening With Tether?

Tether is now hitting new lows every day. During the recent crypto meltdown, investors have pulled out $7 billion from the world’s largest stablecoin.

According to CoinMarketCap, the market circulation of Tether, commonly known as USDT, fell from over $83 billion on May 11 to roughly $76 billion on Tuesday, May 17. In addition, another prominent stablecoin, UST, and its sister crypto, LUNA, both crashed simultaneously.

Here’s a snapshot of how Tether’s price has been declining over the last month:

Source: Coinmarketcap.com

Before we dive deeper, let’s have a quick overview of Tether.

What is Tether?

USDT is a stablecoin (stable-value cryptocurrency) created by Tether, a Hong Kong-based firm. This coin generally matches the US dollar price.

Tether was formerly known as RealCoin and was renamed Tether in November 2014. In February of 2015, it began trading. Tether, which was founded on the Bitcoin blockchain, currently supports the Omni and Liquid protocols of Bitcoin and the Ethereum, TRON, EOS, Algorand, Solana, OMG Network, and Bitcoin Cash blockchains.

With a market valuation of almost $76 billion as of May 2022, Tether is the third-biggest cryptocurrency behind Bitcoin (BTC) and Ethereum (ETH) and also, and it is the largest stablecoin. Tether’s USDT accounted for two-thirds of Bitcoin trades by value in April 2022.

How does Tether work?

Tether issues the appropriate digital amount in tokens when a customer puts fiat money into Tether’s reserve and sells fiat to purchase USDT. After then, the USDT can be traded, saved, or swapped.

If a user puts $100 in the Tether reserve, they will get 100 Tether tokens based on a one-to-one dollar parity. However, when users redeem Tether tokens for fiat cash, the coins are destroyed and taken out of circulation.

Tether, like many other digital currencies, flows across blockchains. As a result, Tether tokens are accessible on various blockchains, including the original Omni on the Bitcoin platform. Liquid, Ethereum (ETH), and TRON (TRX) are among others.

Following the collapse of Terra USD last week, which exposed vulnerabilities in the processes designed to mitigate stablecoin volatility, investors have become skeptical of other cryptocurrencies similar to Tether.

So, why are investors abandoning Tether?

Whatever is going on with Tether has a backstory that entails a controversy. So let’s take a closer look at what happened.

Tether’s Backstory

Tether’s mechanisms have been a source of debate in recent years since they have been ambiguous for a long time.

Its coins are supposed to be backed by fiat currency collateral reserves, making it one of the most reliable stablecoins, alongside the USD Coin, backed in a one-to-one ratio by dollars held in a bank. 

Tether always claimed that it was backed entirely by a 1:1 ratio of dollar notes.

However, a series of lawsuits beginning in 2019—including a New York Attorney General’s investigation into financial mismanagement—has proven that to be untrue:

• Tether’s lawyer indicated in April 2019 that 74 cents backed each currency in cash or cash equivalents.

• Then, in May 2021, Tether released a report revealing that just 2.9% of Tether was backed by cash, with the rest held in a variety of assets, including 49.6% commercial paper—short-term, unsecured debt issued by corporations that provide investors little protection in the event of default.

According to critics, Tether’s self-published reports appear to lack auditing, especially now that the mix of its holdings has allegedly evolved to include more significant assets.

• It released a second report in August 2021, revealing that the cash backing had increased to 10.2%. A significant portion of the pie chart was now in Treasury bills—a short-term debt obligation serviced by the federal government, which had increased from 2.2% to 24.7%.

In a Twitter Spaces chat, Tether’s chief technology officer, Paolo Ardoino, emphasized that a large percentage of its reserves are now in Treasury bills. 

Tether has slashed its exposure to the commercial paper following the previous week’s crisis, which saw the price of Tether briefly fall to 95 cents on Thursday, sparking fears of another bank failure.

So, what now?

The issue now is whether Tether would be able to pay out all of its investors if they all left simultaneously. Ardoino tweeted that the $7 billion was redeemed “in the blink of an eye… we can keep going if the market wishes, we have all the liquidity to manage massive redemptions and pay everyone 1-to-1” on Twitter today.

Investors that lost $50 billion as a result of Terra USD’s downfall, on the other hand, would undoubtedly advise you not to rely or stake money on words alone. 

So, before you make your next move, DYOR!